Reverse mortgage borrowers are getting younger

The average age of people who take out a reverse mortgage is dropping, according to a new study by MetLife. Unfortunately, these types of mortgages come with risks, so younger borrowers need to be careful.

Reverse mortgages allow homeowners who are at least 62 years old to borrow money on their house. The homeowner receives a sum of money from the lender, based largely on the value of the house, the age of the borrower, and current interest rates. The loan doesn’t have to be paid back until the last surviving homeowner dies, sells the house, or permanently moves out.

Today, baby boomers aged 62 to 64 make up more than one-fifth of reverse mortgage applicants, the MetLife study found. Back in 1999, only 6 percent of applicants were in this age bracket.

Of all homeowners who are considering a reverse mortgage, 46 percent are under age 70.

This trend toward younger borrowers could spell trouble. While reverse mortgages can seem like a great idea, there are major downsides. The closing costs for the loans are much higher than for conventional mortgages, and younger borrowers receive less money because their life expectancy is longer. In addition, the borrower is still responsible for property taxes, homeowner’s insurance, and maintenance. If the borrower runs out of money and can’t pay the property taxes, the loan will default and the borrower could lose the house.

The MetLife study also found that most reverse mortgage applicants (67 percent) said they wanted to use the reverse mortgage at least in part to lower household debt. This compares to 27 percent who cited wanting to enhance their lifestyle, and 23 percent who mentioned a desire to plan for the future.

In other words, instead of using a reverse mortgage to pay for health care that would allow them to remain in their homes during their final years, many borrowers are using reverse mortgages to cover short-term financial shortfalls.

MetLife, which recently shut down its own reverse mortgage business, emphasized the need for borrowers to be careful and get as much information as possible when weighing the benefits of a reverse mortgage.